Response to Email About QE and a Letter

I recently received an email with this question about my views on quantitative easing and a letter I signed with others:

“I have a question about the letter you signed back in 2010 asking the Fed not to do QE2. That letter said QE2 risked currency debasement and inflation, and wouldn’t help employment. Do you still believe that? If so, how do you think this will be borne out? And if not, what’s changed your mind?”

Here is the email I wrote in response:

Thanks for your email about QE. I have been concerned about the adverse effects of QE since 2009, and to answer your question it will be helpful for me if I could review some of my research and writings since then. Here is congressional testimony from February 2009 where I listed some risks of the policy as conceived then; these were two-sided, some—mostly shorter run, were about lower growth and higher unemployment, others—mostly long run, were about inflation and loss of Fed independence. I also did some of the earlier empirical studies on QE, which I reviewed in this lecture and later published with Johannes Stroebel. Most of these had to do with the either the ineffectiveness or counter-productiveness of the policy in boosting the recovery. I also listed in this post several articles or blog pieces I wrote before the QE letter, which give more facts and details.

I believe that QE has had, and still has, two-sided risks. The low growth and employment risks have turned out to be much as I warned about. The recovery is much weaker than the Fed expected with these polices. In fact, the events of last May and June made the unwinding uncertainty obvious to just about everyone. The currency and inflation risks are still there too, but they depend on whether the Fed will in fact unwind, and they have been delayed by the weak recovery, which is in part due to the policies.

I described these issues briefly in a response to Paul Krugman a few days ago: “Regarding the current unconventional monetary policy, I have long argued that it creates a two-sided risk: the risk of lower growth and the risk of higher inflation. Thus far the realized risk has been low economic growth with high unemployment. In my view, poor economic policy has been to blame.”

I am sorry that this is such a long response, but to summarize, in my view QE unfortunately did not help employment or growth. And, also unfortunately, it still risks inflation down the road unless the Fed can find a way to gradually unwind. And that unwinding creates more risks.